GameStop Earnings: An Early Look

Dan Caplinger, The Motley Fool |
March 25, 2013

Earnings season is just about over, with almost all companies already having reported their quarterly results. But there are still a few companies left, and GameStop is about to release its quarterly earnings report. The key to making smart investment decisions with stocks releasing their quarter reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed kneejerk reaction to news that turns out to be exactly the wrong move.

GameStop was an innovator in the video-game industry, going beyond selling new games to provide a thriving market in pre-owned video games that gave it a huge competitive advantage. But as console-based games have faded in importance, will GameStop survive? Let's take an early look at what's been happening with GameStop over the past quarter and what we're likely to see in its quarterly report on Thursday.

Stats on GameStop

Analyst EPS Estimate

$2.09

Change From Year-Ago EPS

21%

Revenue Estimate

$3.45 billion

Change From Year-Ago Revenue

(3.5%)

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Will GameStop get a higher score this quarter?Analysts have been a bit antsy over the past few months about GameStop's earnings, with estimates for the just-ended quarter having dropped $0.07 per share. For full-year fiscal 2014, analysts have been less pessimistic, cutting their consensus by just $0.03 per share, but that's been enough to largely hold the stock in check. Share prices have risen less than 3% since late December.

The big problem for GameStop has been the decline in sales of traditional video-game makers. Despite the fact that Activision Blizzard and Electronic Arts have hit new highs recently, EA saw a massive 28% decline in revenue in its holiday quarter. Activision bucked the trend, boosting its sales due largely to its Call of Duty release in November. But for its part, GameStop has fallen short of its original estimates for same-store sales, with comps falling 4.4% during November and December.

Moreover, GameStop's business model is under siege. Microsoft could try to incorporate activation codes in the validation process for software installations that could prevent used games from being resold. If that works, then game-makers will benefit, but GameStop will lose a huge source of revenue.

In its quarterly report, watch GameStop for signs of how much its big share buybacks have helped boost earnings. Unless a potential PlayStation 4 release reinvigorates the console industry, GameStop's best move for its spare cash flow may well be to buy investors out and accept a gradual shrinking of the company going forward.

GameStop relies on a healthy video-game sector, and while Activision and Microsoft have been taking the headlines when it comes to console gaming, Fools following the gaming sector would do well to also keep tabs on Electronic Arts. We can help. Our new special report breaks down the risks and opportunities facing the company to help you decide if EA is right for your portfolio. Click here to get your copy now.

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